Acquire factoring and expand finance
Incident: On the evening of March 16, 2017, Farsheng released its 2016 annual report. According to annual report data, the company achieved operating income of 1,907 billion yuan for the full year of 2016, an increase of 9.32% over the previous year, and achieved net profit attributable to shareholders of listed companies of 140 million yuan, an increase of 2456.84% over the previous year. There are two main reasons for the sharp increase in net profit. One is the profit from the company's transfer of 100% of the shares of the three metal products subsidiaries in 2016, and the other is that the company successfully completed the acquisition of Mashan Factoring and achieved a merger.
The growth rate of the metal products business is slowing down, and business adjustments have increased total profits.
(1) The metal products business has been affected by macroeconomics and is slowing down. In 2016, Farsheng was committed to upgrading and optimizing the product industry structure of the metal products business, but due to the macroeconomic downturn, the company's metal products revenue was 1.42 billion yuan (-0.4% compared to the same period last year), accounting for 74.5% of revenue (7 percentage points less than the same period last year). The metal products business performance slowed down, and gross margin in 2016 was 6.97% (down 5% from the previous year).
(2) Transfer of subsidiary shares to increase total profits. In 2016, the company adjusted its metal products business and completed the transfer of 100% of the shares of the three subsidiaries of Jiangsu Farsheng Special Steel Products Co., Ltd., Jiangsu Farsheng Cable Sales Co., Ltd., and Jiangyin Falsheng Metal Products Co., Ltd. The net profit contributed to the company reached 72% of the total net profit.
Acquire Mashan Factoring to expand financial business.
(1) The acquisition of Mashan Factoring promotes financial transformation. The company passed a bill to acquire 100% of the shares of Shanghai Moshan Commercial Factoring Co., Ltd. in cash in April 2016. The acquisition was completed in the first half of 2016. Moshan Factoring became a wholly-owned subsidiary of the company, and the company's main business increased commercial factoring business. The financial business for the full year of 2016 brought revenue of 486 million yuan (+53% year on year) to the company, accounting for 25.5% of total operating income (an increase of about 7 percentage points over the same period of the previous year), achieved net profit of 126 million yuan, and successfully completed the performance promises of 120 million yuan in 2016 (performance promises of 160 million yuan and 185 million yuan respectively in 2017 and 2018). The gross margin of the financial business reached 35.7%. The future factoring business will bring about a steady increase in the company's performance.
(2) Mashan's factoring business and capital strength continue to improve. Moshan Factoring was one of the first commercial factoring companies in the free trade zone. In 2015, Mashan Factoring issued the first domestic factoring ABS (Mashan Factoring Phase I Asset Support Special Plan) and the second domestic factoring ABS (Moshan Factoring Phase II Asset Support Special Plan). The cumulative business scale reached 6.17 billion yuan. In 2016, it continued to focus on ABS issuance and completed ABS Phase III in August. In the same year, Mashan Factoring's registered capital increased from 300 million to 635 million. In the same year, Mashan Factoring's registered capital increased from 300 million to 635 million yuan, and its business and capital strength continued to improve, obtaining low costs for subsequent companies. Market-based capital lays a solid foundation.
China's factoring industry is developing strongly and has broad prospects. According to data from the International Factoring Association (FCI), China's total factoring business in 2015 was 352.88 billion euros (second in the world in total, equivalent to RMB 2.6 trillion), accounting for only 3.7% of GDP. By the end of 2015, the factoring business volume of the UK, France, Italy and other countries with the most developed factoring industry in Europe all accounted for more than 10% of GDP. There is still plenty of room for development in China's factoring industry in the future.
Investment advice: Buy an -A investment rating, target price of 15.2 yuan for 6 months. We expect the company's revenue growth rates from 2017 to 2019 to 0.4 yuan, 0.45 yuan, and 0.51 yuan respectively.
Risk warning: macro risk, credit risk, market risk.